After Buying Pandora, Will SiriusXM Make a Deal for Live Nation?

Investors greeted satellite radio giant SiriusXM’s $3.5 billion all-stock deal for music streaming and recommendation firm Pandora with the stock market equivalent of boos on Monday, as the stock dropped 10.3 percent. After all, Pandora has been losing money and is expected to report a loss of around $150 million this year.

SiriusXM, led by CEO Jim Meyer, sees the deal as a chance to boost its reach beyond its 36 million subscribers in North America and more than 23 million trial users. “The majority of ‘trial-ers’ ultimately decide not to pay for our service,” Meyer said on a call with analysts about the deal. He added that SiriusXM “would benefit from having a free funnel,” which some analysts say it could use to drive users to its subscription service.

Pandora has more than 71 million monthly active users, giving the combined firm the largest digital audio audience in the U.S. The deal particularly allows SiriusXM to move beyond its traditional in-car users and more aggressively push into the streaming space.

“Sirius’ business model, steeped in its new and used car trial funnel, superior execution and the long life cycle of automobiles have allowed the company to continue growing subscribers, even as music streaming services have grown in popularity. Yet, growth is set to become more challenging, as used car conversions slow,” said BTIG analyst Brandon Ross. “The company has been slow to attack digital, failing to prioritize it until very recently. Its mobile apps have improved in 2018. However, mobile is still not a real source of subscribers, nor usage. We believe Pandora will help change this.”

Pandora can “benefit from Sirius' much stronger balance sheet with greater ability to invest in the business and content with competition from other music services owned by larger companies, such Amazon, Apple, and Google,” said Moody’s Investors Service analyst Gregory Fraser in a report.

The deal gives Pandora “potentially the ability to use some of SiriusXM’s licensed content to drive listening and ad revenue,” especially as Pandora’s management “has been seeking to transition to more spoken word content not controlled by the major record labels,” said Evercore ISI analyst Vijay Jayant.

Buckingham Research Group analyst Matthew Harrigan argued that the combination would in this regard help the two companies, but not hurt digital rivals. “SiriusXM and Pandora in tandem will be even more important to music artists and labels, with about $2 billion in combined annual royalty payments. There should be possibilities for Pandora to raise gross margins by at least several hundred basis points off lower minimum guarantees,” he explained, but added: “We do not expect the deal to have significant impact on the paid streaming market, with larger competitors like Spotify, Amazon Music, and Apple Music.”

Pandora’s 6 million paying subscribers (and 71.4 million total active users) as of the end of the second quarter pale in comparison to Apple Music’s 50 million subscribers including trial memberships and Spotify’s 83 million (and 180 million total active users) as of then.

Ross says the future will see the digital music giants look to grab a large piece of SiriusXM’s pie. “It is inevitable that Spotify, Amazon and Apple build further hegemony in the car at Sirius’ expense (just look at the recent improvements in Apple’s Carplay, Android Auto and the Amazon’s Alexa in-car expansion),” he said. “Each is focused on significantly improving the ease of use in the car and is attacking non-music content — a key differentiator for SiriusXM. Thus, as growth (or stability) inside the car comes into question, Sirius needs a new subscriber funnel.” Added Ross: “SiriusXM and Pandora are better off together than apart, even if the combined company has structural disadvantages versus the likes of Spotify, Amazon and Apple.”

The deal could also boost the advertising revenue Pandora, and in turn SiriusXM, attracts. “Pandora will afford Sirius the ability to capture trialers who opt out of paying for the service,” explained Macquarie Capital analyst Amy Yong. “Capturing about 25 percent of the $15 billion-$17 billion AM/FM ad pie could equate to $3 billion-$5 billion in incremental revenue.”

Added Harrigan: “Advertising technology synergies are appealing, with Pandora commanding 65 percent share in digital audio advertising and having just acquired AdsWizz, the largest programmatic digital audio business, in May.”

While SiriusXM has mostly focused on the revenue upside potential, analysts also see some cost savings in such areas as ad sales and streaming infrastructure. Some on Wall Street expect the next step for the combined company to be a deal for concert and ticketing powerhouse Live Nation. After all, John Malone’s Liberty Media, which owns SiriusXM, also has a big stake in Live Nation. “The addition of Live Nation to the portfolio could be compelling,” said Yong.

And BTIG’s Ross said: “SiriusXM and Pandora has merit, but Live Nation completes the puzzle.”

He sees “numerous synergies” between Live Nation and Pandora. “Pandora’s core business is its ad-based service. Advertising and sponsorship has become a more important part of Live Nation’s flywheel. Pandora presents Live Nation with the opportunity to leverage its brand relationships to extend off-site onto an owned and scaled platform. The company could sell large integrated advertising and sponsorship packages to brands, both locally and nationally,” the analyst explained. “Next, data continues to gain in importance. As much as Live Nation touts its own data, it would clearly be beneficial to marry it with listening data. Live Nation could use this data to help plan and promote/market tours.”

Ross said the fact that the Pandora deal was all in stock may be a sign of SiriusXM’s plans. “One of the more puzzling aspects of the Pandora deal was its all stock financing, especially considering the cash firepower of Sirius,” he said. “Perhaps Sirius is saving that cash for an eventual cash component to a Live Nation deal.”